Careful What You Wish For. . .

The decision by the Court of Appeals for the District of Columbia to invalidate President Obama’s recess appointments of three members to the National Labor Relations Board calls into question the authority of Richard Cordray to act as the Acting Director of the CFPB, as well as the validity of regulations promulgated by the Bureau during his tenure. Although the ruling is only binding on the NLRB, according to the SCOTUS blog, a law suit challenging the CFPB’s authority is making its way through the D.C. circuit. There is nothing in the Court’s logic to suggest that Cordray’s appointment will not also be invalidated. For those of you who continue to believe that the CFPB is just a bad dream from which you will wake to find that you really still are in Kansas, the decision may seem like welcome news. But in reality, it’s bad for credit unions, specifically, and the financial industry, in general. Here’s why:

Let’s say that the Court’s ruling is ultimately upheld by the Supreme Court and all the regulations promulgated by the Director are invalidated. Remember that most of the core requirements outlined in the Dodd-Frank Act, such as those related to the qualified mortgage regulations that were recently finalized, would have taken place with or without regulatory action this January. In other words, doing away with the regulations wouldn’t do away with your obligation to comply with the requirements, you would simply have to do so with less guidance.

You can disagree with the statute all you want, but the CFPB has actually shown more sensitivity to the needs of credit unions, and community banks for that matter, than is mandated by statute. No Court would have the power to exempt credit unions from some of the qualified mortgage and servicing requirements, as the CFPB is proposing.

We’ve heard a lot about regulatory uncertainty over the past couple of years. As I pointed out in my last blog, I believe that the mortgage provisions of Dodd-Frank are a disaster for small financial institutions. But these requirements are going to be imposed at some point and the continued period of uncertainty is simply going to drive up the cost of compliance. It’s time to get the lawyers out of the courtroom and let the compliance people figure out how they are going to get the sailboat in the bottle.

Even if, somehow, this court’s decision is limited to the NLRB, it still is extremely significant for credit unions. The NLRB has aggressively moved to impose restrictions on institutions even if they are not unionized. Wiping out these rulings would give employees more breathing space than they currently have.

So what happens now? Given my somewhat atrocious skills at prognostication lately, I won’t hazard a guess as to how this plays out, But the administration has three options: it could simply decide not to appeal the ruling, which makes no sense since it has nothing to lose; it could request that the entire D.C. circuit, as opposed to a three-judge panel, rehear the case; or it could appeal to the Supreme Court. The one thing I will predict is that one way or another, this issue will ultimately be decided by the Supremes.